MARC Ratings has affirmed its rating of AA-_IS with a stable outlook on MY E.G. Services Berhad’s (MYEG) Islamic Medium-Term Notes (IMTN) Programme of up to RM1.0 billion in nominal value. The current outstanding under the programme stands at RM575 million.

The rating affirmation incorporates MYEG’s well-established position as a concessionaire for e-government services, and the growth of its concession-related and non-concession businesses, underpinned by strong information technology (IT) infrastructure. The rating also considers MYEG’s high operating margin and healthy cash flow generation. Moderating the rating are regulatory concerns on the renewal of its concession business as well as market and operational risks associated with its new business ventures.

MYEG currently has two concessions — the renewal of driver licenses for Jabatan Pengangkutan Jalan (JPJ) and the renewal of foreign worker permits for Jabatan Imigresen Malaysia (JIM). The JPJ concession is for a period of three years expiring in May 2026 while the JIM concession is for a period of two years of which the commencement date will be finalised in due course. The rating agency notes the group’s concessions remain exposed to renewal and termination risks though these are mitigated by MYEG’s lengthy track record and established infrastructure. Nonetheless, any impact on the group’s credit profile from termination of concessions is considered limited given their low contribution to group revenue, accounting for 5% in 1H2023.

MARC Ratings notes positively the group’s ability to diversify its revenue base by expanding its non-concession businesses. Apart from fees generated from insurance renewals and foreign worker recruitment, the group also receives rental income from providing accommodation for foreign workers. Construction of additional foreign worker hostels is expected to commence in 1Q2024 — two in Johor (Tanjung Langsat and Muar), two in Selangor (Sungai Buloh and Rawang) and one in Penang (Batu Kawan). These hostels would accommodate about 30,000 workers and add to the existing two foreign worker hostels in Selangor and Melaka, each housing around 400 workers. 

MYEG’s blockchain platform, Zetrix, would be the key revenue contributor when the platform becomes operational at end-2023, and will account for RM70 million to RM306 million of revenue between 2023 and 2025. The platform is expected to improve efficiency by shortening the administrative timeline for import- and export-related services between China and Malaysia. In this regard, MYEG signed a partnership agreement with the General Administration of Customs of China (GACC) in March 2023 to jointly provide cross-border trade facilitation services that include issuing certificates of origin through Zetrix. As at end-June 2023, the group recorded RM33 million in revenue from its blockchain operation from private investors. In October 2023, it launched an initial exchange offering (IEO) which would potentially generate about RM160 million annually. Currently, MYEG is the sole provider of this service to China and has first-mover advantage to mitigate any arising competition. Nonetheless, while we note that MYEG will be able to harness the potential of blockchain technology, the widespread acceptance of this technology for trading purposes is yet to be realised.

For 1H2023, group revenue rose by 10.7% y-o-y to RM358.1 million, mainly attributed to higher contribution from its existing immigration-related services and by new services on the blockchain platform. Operating profit margin remained strong at 63.4% while cash flow from operations (CFO) stood at RM300.0 million. CFO from existing businesses would remain supportive of CFO debt and interest coverages being well within the rating band. Pre-tax profit increased by 24.3% y-o-y to RM217.1 million. Total borrowings amounted to RM536.9 million as at end-1H2023 from the issuance of its sukuk programme of RM250.0 million to fund repayment and working capital requirements. Nevertheless, a dividend reinvestment plan (DRP) of about RM49 million in 2022 moderated its debt-to-equity (DE) ratio from the increase in borrowings to 0.27x. Cash and bank balances of RM252.5 million and unutilised credit facilities of about RM138.6 million would support the group in meeting its financial obligations. 

The stable rating outlook reflects MARC Ratings’ expectation that MYEG would broadly maintain its credit profile to be commensurate with the rating band over the next 12 months.

Any upward revision to its rating would mainly be guided by sustained growth from profitability particularly from its new businesses while other credit metrics remain strong. Conversely, the rating and/or outlook would come under pressure if negative changes in its business profile and/or if its new businesses perform substantially below projections lead to a sharp decline in its credit metrics.